Investors Met With Slowing Returns on Capital At Snam (BIT:SRG)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Snam (BIT:SRG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Snam is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.067 = €1.4b ÷ (€29b - €8.1b) (Based on the trailing twelve months to June 2022).

Thus, Snam has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

See our latest analysis for Snam

In the above chart we have measured Snam's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Snam.

What Does the ROCE Trend For Snam Tell Us?

The returns on capital haven't changed much for Snam in recent years. The company has consistently earned 6.7% for the last five years, and the capital employed within the business has risen 27% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 28% of total assets, this reported ROCE would probably be less than6.7% because total capital employed would be higher.The 6.7% ROCE could be even lower if current liabilities weren't 28% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Key Takeaway

As we've seen above, Snam's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 3 warning signs for Snam you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.